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25 May 2018

U.S. and Mainland China Reach Agreement on Trade Concerns

According to a joint statement issued on 19 May, the United States and mainland China have reached an agreement that will result in the suspension of U.S. plans to impose additional tariffs of 25 percent on approximately 1,300 tariff lines of mainland Chinese products worth some US$50 billion. The additional tariffs were on the table as part of the U.S. response to a Section 301 investigation concluding that mainland China is coercing U.S. companies into transferring their technology and intellectual property to mainland Chinese enterprises. In response, mainland China had threatened to impose retaliatory tariffs of 25 percent on 106 U.S. products also worth some US$50 billion, but that proposal has also been put on hold.

The deal was struck following a series of meeting held on 17-18 May between high-level delegations led by U.S. Treasury Secretary Steve Mnuchin, U.S. Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer on the U.S. side, and State Council Vice Premier Liu He on the mainland Chinese side. According to the joint statement, the two sides reached a consensus on “taking effective measures to substantially reduce the United States trade deficit in goods with China.” More specifically, to meet the growing consumption needs of the mainland Chinese people as well as the need for high-quality economic development, mainland China has committed to “significantly increase purchases of United States goods and services”, including agricultural and energy goods. The joint statement indicates that the United States will send a team to mainland China to work out the details of this deal.

The delegations also discussed expanding trade in manufactured goods and services and reached a consensus on the need to create favourable conditions to increase trade in these areas. Additionally, the United States and mainland China agreed to strengthen co-operation on intellectual property rights and Beijing committed to advance relevant amendments to its laws and regulations in this area, including the Patent Law. The joint statement adds that the two sides agreed to encourage two-way investment and will strive to create a fair, level playing field for competition. High-level engagement on these matters will continue in the weeks and months ahead as the two sides seek to resolve their economic and trade concerns “in a proactive manner.”

The agreement was reached less than two weeks after senior U.S. and mainland Chinese officials rejected each other’s demands on resolving bi-lateral trade irritants during a two-day gathering in Beijing. The relatively swift resolution of the bi-lateral trade dispute is somewhat of a surprise because the demands made by the United States at the Beijing meetings were widely perceived as unworkable and unachievable and described by a well-known economics professor as “the terms for a surrender rather than a basis for negotiation.” They included demands to:

reduce mainland China’s trade surplus with the United States by US$200 billion by the end of 2020, mostly by increasing purchases of U.S. goods;

immediately cease market-distorting subsidies and other types of government support that can contribute to the creation or maintenance of excess capacities in the industries targeted by the “Made in China 2025” industrial plan;

eliminate specified policies and practices with respect to technology transfer by 1 January 2019;

take immediate steps to ensure a halt to cyber-enabled theft targeting intellectual property and trade secrets;

terminate World Trade Organisation cases against U.S. tariffs on mainland Chinese goods and the U.S designation of mainland China as a non-market economy for trade remedy purposes;

commit not to take retaliatory actions of any kind (e.g., tariffs, sanitary and phytosanitary measures, technical barriers to trade, antidumping or countervailing duties, or discriminatory inspection, quarantine or testing practices) against U.S. restrictions on investments or imports;

abide by U.S. export control laws;

issue by 1 July an improved negative list for foreign investment (i.e., investment is allowed in all sectors but those named);

by 1 July 2020, reduce tariffs on all products in non-critical sectors to levels no higher than those of the United States, while recognising that the United States may impose tariffs on products in critical sectors, including those in the “Made in China 2025” plan; and

improve market access for U.S. services and agricultural products.

While the joint statement is noticeably vague and the specific details of the deal have not otherwise been disclosed, press reports indicate that the two sides are ostensibly working on a US$200 billion bi-lateral deficit reduction target (although Beijing has reportedly denied agreement on a concrete figure), which would be achieved through increased U.S. exports to mainland China in combination with fewer tariff and non-tariff barriers on U.S. goods. In a 20 May appearance at Fox News Sunday, Mnuchin commented that “I think you could see US$50 billion, US$60 billion a year of energy purchases over the next three to five years” as well as “35 to 45 percent increases in agriculture this year alone.” National Economic Council Director Larry Kudlow, meanwhile, has suggested that mainland China will ease foreign investment hurdles by removing foreign equity caps and allow foreign ownership of mainland China-based companies.

Vice Premier Liu declared separately that mainland China “is ready to buy goods not only from the United States but also from around the world.” He highlighted a commitment to step up trade co-operation in such areas as energy, agricultural products, health care, high-technology products and finance, while enhancing bi-lateral collaboration in mutual investment and intellectual property protection. Liu also said that mainland China will accelerate implementation of President Xi Jinping’s remarks at the Boao Forum for Asia Annual Conference 2018, where he proposed to advance mainland China’s efforts to facilitate market access, foster a more attractive investment environment, strengthen intellectual property protection, and increase imports from other countries.

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